MercoPress. South Atlantic News Agency

Sterling tumbles as Merkel admits a Brexit deal was “overwhelmingly unlikely”

Allegedly Merkel told PM Johnson that a deal was doomed unless London agreed to keep UK-run North Ireland that borders Ireland in the bloc's customs union

The British pound tumbled on Tuesday after German Chancellor Angela Merkel reportedly warned that a Brexit deal was “overwhelmingly unlikely”, further stoking fears of a disorderly and costly departure from the EU.

Merkel told British Prime Minister Boris Johnson that a deal was doomed to fail unless London agreed to keep British-run Northern Ireland that borders EU-member Ireland in the bloc's customs union, a Downing Street source said.

The host of next week's European summit, EU Council president Donald Tusk, in turn accused British Prime Minister Boris Johnson of trying to shift blame for the failure of the Brexit talks.

“Markets are having to focus on the various potential outcomes which are now imminent,” Interactive Investor analyst Rebecca O'Keeffe said, “a deal looks very unlikely unless the EU blinks first.”

Losses were exacerbated by official data showing that British productivity tumbled at its fastest rate in five years in the second quarter of 2019.

Stock markets on both sides of the Atlantic meanwhile posted losses on growing investor doubts over chances of success in this week's China-US trade talks.

Losses for London stocks were limited thanks to the weak pound, which boosts multinationals earning in stronger currencies, but Paris and Frankfurt fell more than one percent. Meanwhile on Wall Street the Dow Jones index was also down more than one per cent in late morning trading.

There had been a general feeling in recent weeks that a solution to the long-running US-China tariffs saga may be found, providing some much-needed support to equities in the face of worsening economic data.

Beijing's top trade envoy Liu He is due to meet US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin on Thursday.

But observers warn it is unlikely progress will be smooth, with reports this week saying China had cut back on the number of areas it is willing to discuss, suggesting leaders sense weakness in the White House as Donald Trump faces impeachment proceedings and a slowing economy.

The US on Monday announced it would blacklist 28 Chinese firms that it says are implicated in rights violations and abuses targeting Uighurs and other mostly Muslim minorities, which could further complicate the trade talks.

The trade meeting comes just over a week before a new round of punitive tariffs is due to be imposed on China.